What Should Be Included in a Non-Profit Budget?

A non-profit budget serves as a detailed financial roadmap, outlining how an organization plans to allocate its resources to achieve its mission. This strategic document ensures fiscal responsibility and transparency. A well-constructed budget helps a non-profit manage cash flow, make informed decisions, and demonstrate accountability to donors and stakeholders. It reflects the organization’s priorities and operational strategies for a defined period, typically a fiscal year.

Revenue Streams

A non-profit budget details all anticipated income sources, beginning with individual contributions. These gifts from individual donors can range from recurring monthly donations to significant one-time gifts and major philanthropic contributions.

Grants form another substantial component of non-profit revenue, sourced from foundations, corporations, and government agencies. Unrestricted grants can be used for any organizational purpose, and restricted grants are designated by the grantor for specific programs or time periods. Proper budgeting accounts for these distinctions to ensure funds are utilized according to donor stipulations.

Program service fees represent income generated directly from the services a non-profit provides to its beneficiaries. Examples include tuition fees for educational programs, ticket sales for cultural events, or consulting fees for specialized services.

Special events are a common fundraising method, contributing revenue through activities such as galas, auctions, and charity races. The income from these events, after deducting associated costs, provides valuable support for the non-profit’s operations.

Investment income, derived from endowments or other invested funds, also contributes to a non-profit’s financial capacity. This income can provide a stable, ongoing source of revenue, with projections based on market conditions and investment policies.

In-kind contributions, such as donated goods or professional services, are valuable non-cash resources. While their detailed valuation and accounting are complex, the budget can reflect their estimated monetary value to present a complete picture of resources available to the organization.

Expenditure Classifications

A non-profit budget categorizes expenses, beginning with program expenses, which represent the direct costs of fulfilling the organization’s mission. These expenditures include direct service costs, salaries for staff directly involved in program delivery, and the cost of supplies used for specific programs.

Administrative expenses, often referred to as management and general expenses, cover the overhead costs for the overall operation and management of the non-profit. This category includes executive salaries, office rent, utility payments, and professional fees for accounting and legal services.

Fundraising expenses encompass all costs incurred to solicit contributions and secure financial support. This includes the salaries of development staff, marketing expenses for fundraising appeals, and the direct costs associated with special fundraising events. Form 990 requires detailed reporting of these functional expenses.

Personnel costs typically constitute the largest portion of a non-profit’s budget and are broken down within their respective functional categories (program, administrative, fundraising). These costs include salaries, wages, employee benefits such as health insurance and retirement contributions, and payroll taxes.

Occupancy costs cover expenses related to the physical space occupied by the non-profit. This category includes rent or mortgage payments, utilities like electricity and water, and general maintenance expenses.

Other operating expenses capture costs not covered in the primary categories, such as travel for organizational activities, professional development and training for staff, and office supplies. Technology expenses, including software licenses and hardware maintenance, also fall under this category.

Specific Financial Elements

Non-profit budgets feature distinct financial elements, notably the distinction between restricted and unrestricted funds. Unrestricted funds can be used for any purpose that supports the organization’s mission, providing flexibility in operations. Restricted funds are designated by donors for specific programs, projects, or time periods. Budgeting must clearly segregate these funds to ensure compliance with donor stipulations and proper resource allocation.

Capital expenditures involve significant investments in assets like buildings, major equipment purchases, or extensive renovations. These costs are budgeted separately from recurring operating expenses due to their large scale and long-term nature. Planning for capital expenditures is crucial for the organization’s long-term sustainability and growth.

Depreciation, a non-cash expense, is an important consideration in a non-profit budget. It represents the systematic allocation of the cost of a tangible asset over its useful life. Although it does not directly impact current cash flow, including depreciation aids in understanding the full cost of operations and informs future capital planning.

In-kind contributions represent both a resource received and an expense incurred. These non-cash donations, such as pro bono professional services, donated goods, or volunteer time, are assigned an estimated fair market value. For instance, if a lawyer provides free legal services, the estimated value of those services is recorded as both an in-kind contribution (revenue) and a legal expense. This dual entry provides a complete picture of the economic resources utilized by the organization.

Supporting Budgetary Details

Budget assumptions are foundational, representing the underlying beliefs and projections used to construct the financial plan. These might include anticipated fundraising success rates, projected program growth, expected inflation rates, and planned staffing levels. Clearly stating these assumptions allows stakeholders to understand the basis for the financial projections.

A narrative or budget justification provides a written explanation accompanying the financial figures. This narrative offers context for the numbers, highlighting key strategic initiatives and explaining significant changes from previous budget periods. It helps to tell the story behind the budget, making the financial plan more accessible and understandable to a broader audience.

Establishing a contingency fund or a formal reserve policy is also an important aspect of sound financial planning for non-profits. A contingency fund is a specific line item within the budget to cover unforeseen expenses or unexpected revenue shortfalls, typically ranging from 5% to 20% of the total operating budget. A reserve policy outlines how a larger operating reserve fund will be built and maintained to ensure the organization’s financial stability over the long term.

Linking budget line items to Key Performance Indicators (KPIs) further enhances the budget’s utility. While not direct financial components, KPIs are measurable outcomes that help track progress toward mission achievement and justify spending. For example, a budget allocation for a literacy program could be linked to the KPI of improving reading levels for a certain percentage of participants. This connection demonstrates how financial resources are directly contributing to the organization’s programmatic goals.

References

Internal Revenue Service. Form 990.
National Council of Nonprofits. Financial Management.